Contemporary Issues in Business – Assignment III| Hyperinflation, Causes and Concerns|
Table of Contents
Effects and Concerns9
Case Study (Zimbabwe)14
Hyperinflation indicates a phenomenon wherein a country experiences very high and increasing rates of inflation in a short span of time. In such a condition, the prices keep on increasing and the currency quickly loses its value. The difference between inflation and hyperinflation is in the rapidity and magnitude of the change. Although the threshold is arbitrary, economists generally reserve the term hyperinflation to describe episodes when the monthly inflation rate is greater than 50%. If this rate is compounded over a year, prices multiply by a factor about 130 in a year. Hyperinflation happens when government starts printing far more paper money than is backed by the country’s economy in terms of industrial output or precious reserves. This is usually done to pay for government expenditure or to monetize national debt and results into sudden devaluation of the currency. The uncertainty about the currency’s future worth causes people to start trading it off for commodities such as food grains, land or more reliable stores of value such as gold or a hard currency, if possible. The velocity of paper money through the system increases as people attempt to get rid of it. This leads to ridiculously high prices and the paper money becomes worthless for any transactions within and outside the country.
Before the advent of paper money, kings & monarchs would simply debase the coins by removing the quantity of precious metal in them and increase the number in circulation. Each coin would have less gold or less silver in it, though the rulers who issued the currency would insist that the coins were worth just as much. This would lead people to hoard the old coins and use the debased ones for their daily transactions. People would then melt the old coins and sell the metal, which would be more valuable than the face value of the coins. Hyperinflation is a mutated version of the currency debasement. The world's first recorded hyperinflation came during the French Revolution, where monthly inflation peaked at 143%, but it took until the 20th century for this type of out-of-control inflation to happen again.
During the 20th century, hyperinflation occurred 31 times globally including those in Europe, Asia, Africa and Latin America. The United States has never been a victim of hyperinflation but came close twice - during the Revolutionary War and Civil War - when the government printed currency in order to pay for its war efforts. However, in both of these cases, inflation never exceeded a 50% monthly inflation rate.
Following table illustrates top 10 examples of countries hit with periods of hyperinflations: Location| Start date| End date| Highest monthly inflation rate %| Hungary| Aug 1945| Jul 1946| 4.19 x 10^16 |
Zimbabwe| Mar 2007| Nov 2008| 7.96 x 10^10 |
Yugoslavia| Apr 1992| Jan 1994| 313,000,000 |
Republika Srpska| Apr 1992| Jan 1994| 297,000,000|
Germany| Aug 1922| Dec 1923| 29500 |
Greece| May 1941| Dec 1945| 13800 |
China| Oct 1947| May 1949| 5070 |
Armenia| Oct 1993| Dec 1994| 438 |
Turkmenistan| Jan 1992| Nov 1993| 429|
Taiwan| Aug 1945| Sep 1945| 399|
Note that many of the worst hyperinflation episodes in history were associated with the end of a war or civil unrest.
The root cause of hyperinflation is a series of ill-advised and inflammatory fiscal policy decisions resulting into rapid increase in the money supply that is not supported by a growth in the economy. This is simply because the process of escalating the supply of money through paper notes is an easy escape route. In fact, most cases of hyperinflation are known to have reverted back to hard currency as a measure of...